Related Information

International Trading Glossary

A–E

American option
An option that can be exercised at any time up to and including the expiry time on the expiration date. Also see European option.

At the Money (ATM)
A currency option whose strike price is equal to the prevailing spot rate or the prevailing rate corresponding to the contract’s expiry date.

Call optionAn option that gives the holder the right (but not the obligation) to buy a fixed amount of currency from the option writer (option seller) at a predetermined exchange rate (strike price) prior to the option’s expiry stipulated in the contract.

Central bank
The only institution that has the right to issue banknotes and that constitutes the monetary and credit policy authority of a country or currency zone. The central bank also supplies the economy with money and credit, regulates domestic and foreign payment transactions, and maintains internal and external monetary stability.

Collar
An option contract that sets upper and lower exchange rate parameters that will apply even if the market rate lies outside this range.

Discount
The amount a forward rate is reduced relative to the spot rate, i.e., the forward rate is lower than the spot rate.

Eurozone
The Eurozone specifically refers to the member countries that belong to the Economic and Monetary Union of European and which have adopted the Euro in place of having a national currency.

Eurodollar
Name for U.S. dollar-denominated deposits and claims held outside the U.S.

European option
An option that can be exercised only on the expiration date, not during the option period as with an American option.

Exchange control
State control of all payment and asset transactions with foreign countries.

Exchange rate
The price or ratio of one currency in relation to another currency. For example, the USD/JPY exchange rate represents the price of one U.S. dollar expressed in Japanese Yen.

Exercise price
The price at which the option buyer can purchase (call option) or sell (put option) the underlying currency. Also called the strike price.

Expiration date
The last day on which an option can be exercised.

Export letters of credit
An export letter of credit is used in trade transactions, and guarantees payment to the Seller as long as proper documentation regarding the transaction is received and is provided to the issuer of the letter of credit. An export letter of credit is used to reduce the supplier’s (exporter’s) risk of non-payment from their overseas buyers and can expedite payments to the supplier when they comply with the requirements of the letter of credit. The buyer’s bank commits to ensuring payment to the supplier when the terms and conditions of the letter of credit have been met, usually based on presenting the correct documents as required in the letter of credit.

F–O

Foreign exchangeWorldwide system of contracts between non-bank foreign exchange dealers and foreign exchange traders (bank and non-bank) that are executed by telephone, telex, internet or personal market computer; place or entity where foreign exchange rates are determined.

Foreign draft
A foreign draft is a draft drawn on a bank in a country outside of the U.S., which is payable in the currency of the country where such foreign bank is located. A foreign draft is a convenient way to make payment in a foreign currency.

Forward contract
An agreement to convert ("buy" or "sell") a set amount of a foreign currency on a future, or "forward ", date at a specified exchange rate. Forward window and non-delivery forward contracts are types of forward contracts.

Functional currency
The working or operating currency of a corporate affiliate, as defined by Financial Accounting Standards Board Statement No. 52

Import letters of credit
Method of payment that obligates buyers to pay only when the seller makes a compliant presentation of documents required in the letter of credit to the buyer’s bank in lieu of a cash payment in advance. Import letters of credit help buyers (importers) purchase goods or materials from suppliers abroad who want payment guaranteed by a reputable bank. This extension of credit on behalf of the buyer helps the buyer expand its network of foreign suppliers and reduces its trading partners’ risk of not getting paid. This is particularly important when working with new suppliers.

Letter of credit
Document issued by a bank stating its commitment to pay someone (supplier/exporter/seller) a stated amount of money on behalf of a buyer (importer) so long as the seller meets very specific terms and conditions as detailed in the letter of credit. Many suppliers (exporters) require letters of credit from their buyers (importers) to reduce the risk of non-payment by the buyers. See also Import letters of Credit and Export Letters of Credit.

Mark-to-market
The current market value of a contract based on current market prices.

Notional amount
The value or quantity of the currency or other asset that is being delivered or used to calculate payments due on a contract.

Option
The contractually agreed-upon right to buy (call) or sell (put) a specific amount of currency at a predetermined price on (in the case of a European-style option) or up to (in the case of an American-style option) a future date. A fee (premium) is paid up front for an option.

In-the-money call option is when the market price is greater than the strike price.

In-the-money put option is when the market price is lower than the strike price.

Out-of-the-money call option is when the market price is lower than the strike price.

Out-of-the-money put option is when the market price is greater than the strike price.

P–Z

Premium
Forward points corresponding to interest rate differentials that are added to the spot rate; also the price of an option that the option buyer pays to the option writer.

Put option
The right (but not the obligation) to sell a fixed amount of currency to the option writer (option seller) at a predetermined exchange rate (strike rate) prior to the expiration date stipulated in the contract.

Reporting currency
The currency in which a parent firm prepares its financial statements.

Spot contract
A contractual obligation to buy or sell foreign currency for settlement on a date which typically is two business days after the trade was made.

Strike price
Price at which the option buyer can purchase (call option) or sell (put option) the underlying currency. Also called the exercise price.

Swap transaction
A foreign exchange swap transaction is an exchange one currency against another currency on a specified date and a reverse exchange of those two currencies at a later date specified in the contract.